STAY SHORT OF CONSENSUS ON ABENOMICS

Takeaway:We reiterate our call for continued consolidation in the “Abenomics Trade” with respect to the intermediate term.

CONCLUSIONS:

We reiterate our call for continued consolidation in the “Abenomics Trade” (i.e. short JPY/long Japanese equities) with respect to the intermediate term. We continue to think both the fundamentals and the crowded nature of positioning in this trade warrant said consolidation.

Specifically, our models call for Japanese economic growth to slow sharply here in 2Q (in line with official estimates), which should weigh on structural inflation expectations and risk appetite among Japanese investors – effectively underpinning a domestic bid for the JPY. Refer to our 2/19 note titled, “MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE?” to review this thesis in more detail.

Externally, we continue to pound the table on the non-consensus view we’ve held all year: accelerating inflation will slow domestic economic growth, at the margins, throughout the balance of 2014. Furthermore, we anticipate that this catalyst will result in decidedly easier monetary policy out of the Federal Reserve – which may manifest in particularly dovish forward rate guidance, or an outright “un-taper” by the mid-to-late summer. Refer to our 4/16 note titled, “10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH” to review this thesis in more detail.

The catalysts outlined in point #3 should continue to result in global selling pressure on the USD – which continues to careen to the downside as a leading indicator for this fundamental backdrop. That’s directly bullish for peer currencies, including the JPY; what’s bullish for the JPY continues to be bearish for the Japanese equity market given the tight inverse correlation that remains in place (YTD r² = 0.70).

Long-term/low-turnover investors should continue to remain in the trade or remain on the sidelines in advance of what we anticipate will be far better entry prices on the short side of the JPY and long side of the Nikkei/TOPIX at some point over the intermediate term. When analyzed in the context of our forecasts for Japanese GDP and CPI, the BoJ’s downwardly revised growth forecasts and stagnant inflation forecasts at today’s non-event BoJ meeting lead us to believe that they are likely to expand their QQE program sometime in mid-to-late 3Q – well after it has become clear to consensus that the Yellen Fed isn’t the hawkish institution consensus currently assumes it is.

Consumer Confidence tanking as rising inflation takes a healthy bite out of the consumer’s wallet:

Business Confidence following suit as the consumption tax hike is spread throughout the supply chain:

Export growth mirroring the dollar/yen rate to some degree:

Import growth surprisingly cooling in the YTD, but ripping alongside global energy prices in the most recent month:

Inflation continues to accelerate and is poised to gap up as the consumption tax is largely passed on to consumers:

Real wages are feeling the pinch of stingy Japanese corporations and policies to tax & inflate out of Tokyo:

Feel free to ping us with any follow-up questions. Have a wonderful evening,

DD

Darius Dale

Associate: Macro Team

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04/30/14 03:45 PM EDT

Poll of the Day Recap: 61% Say $TWTR May Be Down, But It Ain't Out

Takeaway:61% YES; 38% NO

Shares for Twitter have been tanking amid the company’s disappointing earnings report. Prices are currently hovering around $38.

That’s why we asked you in today’s poll: Will shares of Twitter ever surpass its record high of $74.73?

At the time of this post, an optimistic 61% of voters leaned YES; 38% NO.

Most every YES voter agreed that “ever” is a long time, but ranged in their approximate time it might happen:

“It'll definitely hit its $70+ price, probably even within the next 5 years.”

“Twitter is a long-term game changer. It got ahead of itself on price, but ‘ever’ is too long to think ‘never.’”

“Twitter is a powerful platform that is here to stay. I don't see any other platform capable of taking away their clients (celebrities, media, companies, etc..). That content alone is worth many billions that Wall Street has down played. Twitter will inevitably take this to the next step and monetize.”

“Probably back there within 2 years.”

“Twitter isn't going anywhere anytime soon. Valuation got ahead of itself. But as the business grows, it likely gets above $75 at some point. Just look at PCLN after the dotcom bubble...”

“Could be 10-15 years though!”

Conversely, one NO voter said, “I agree that ever is a long time, but something new will likely come along and replace Twitter.”

Eurozone Confidence Wanes; UK Shines

Takeaway:From a quantitative perspective, we maintain our marginally bullish stance on European equities over U.S. equities

Editor's Note: This research note was originally sent to subscribers on April 29, 2014 by Hedgeye Macro analyst Matt Hedrick.

This morning we received Eurozone confidence figures for the month of April. As the charts below show, the data took a step down versus the prior month, and matches confidence figures from the major Eurozone countries that mostly slowed and fell in the April/May period.

We think this inflection lower is but one data point, but indicative of what could play out as a slower growth environment for the remainder of 2014 as the overhangs of high unemployment rates, anti-Euro sentiment, and a sluggish global economy persist. We saw moves higher in confidence figures over the last 12-16 months reflecting improved economic and political outlook, which may now be fully priced in.

From a quantitative perspective, we maintain our marginally bullish stance on European equities over U.S. equities, and signaled early this week that the German DAX broke its TREND level of support. Below we offer up its new levels (see chart below).

From a policy perspective, we continue to expect ECB President Mario Draghi and the Eurocrats to manage expectations over the medium to long term. On Monday Draghi was reported to have said to a German lawmakers that a QE program is relatively unlikely now. We’ll take the comment at face value and believe that opportunistically Draghi will continue to have QE in his back pocket, which should encourage European equities higher. We also underline that Draghi is managing his inflation target of 2.0% over the longer term, and already there are encouraging signs that inflation is percolating:

We expect interest rates to remain “accommodative” = at the present rate or lower, as the bank works on schemes to better unlock lending to the real economy (especially SMEs).

On the currency front, the EUR/USD is trading in a bullish formation, above its TRADE, TREND, and TAIL levels of support, as outlined in the chart below. We expect the cross to trade higher as Eurozone QE remains on hold and as Fed Head Janet Yellen continues her dovish policy stance.

BOE Governor Mark Carney recently said that he’s optimistic about the economy’s recovery, comfortable with the current level of interest rates, and reiterated that when it does see increases in interest rates they will be gradual and limited. This week Lloyd’s Business Barometer showed a meaningful move higher, to 66 in April vs. 44 in the prior reading.

We remain bullish on the equity market (despite being essential flat YTD) and the GBP/USD.

LO Buyout Rumors Persists; Deal Has Challenges

LO is up nearly 3% intraday after closing up 4% yesterday (and hitting all-time highs) – we believe rumors that RAI is interested in acquiring LO are responsible for the move, however we think a hypothetical deal (especially an imminent one) is challenged:

Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.

Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.

RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ.

We’re not surprised to hear rumors that LO is a take-out target. Underling our Best Idea Long Call onLorillard in early March 4th was the strength of its portfolio:

Leading share and profitability of its core menthol business,

Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and

Upside growth in its blu e-cigarette business that commands leading share in the U.S.

As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal.

There’s been no comment from either LO or RAI. Even without consideration of a deal with RAI, we’ve outlined a scenario in which LO’s business propels the stock to $80/share over the longer term. That would be ~ 36% higher than today’s price.

Howard Penney

Managing Director

Matt Hedrick

Associate

Fred Masotta

Analyst

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04/30/14 01:43 PM EDT

PNRA: Much Noise, Little Clarity

PNRA remains on theHedgeye Best Ideas list as a SHORT.

Panera beat muted 1Q14 estimates, posting top line and bottom line surprises of 147 and 225 bps, respectively. Company same-store sales of +0.1% also bested the consensus estimate of -0.6%, driven by +1.7% price and +1.2% mix.

A quick glance at the headline numbers, however, could be materially misleading as the underlying numbers and trends continue to indicate a much longer turnaround than the street expects. Management guided 2Q EPS to $1.70-1.76, well below the current street estimate for $1.84 and tightened its FY14 same-store sales range to 2.0-3.5%. Despite this, they essentially maintained FY14 EPS guidance, tightening the high end of the range by $0.05 to arrive at a new target of $6.80-$7.00.

The release didn’t surprise us one bit and neither has today’s stock action. This morning’s earnings call was, in our opinion, rather painful to listen to – imagine how the bulls felt! All told, we came away from the call with greater conviction in our short thesis. In our view, management sounded unsure of itself and failed to effectively explain why its full-year guidance is not aggressive considering weak transaction trends, commodity inflation and the significant investment ahead. Notably, several analysts sounded increasingly bearish in the question and answer session which we would attribute to an increasingly cloudy outlook. As a result, we expect FY14 street estimates to be revised down over the current quarter. Until we see a meaningful acceleration in trends or a material boost from key initiatives, we continue to believe FY15 estimates are aggressive as well.

What we liked in the quarter:

Revenues of $605.34 million beat the consensus estimate by 147 bps

Adjusted EPS of $1.52 beat the consensus estimate by 225 bps

Company same-store sales of +0.1% beat the consensus estimate of -0.6%

Over 80% locked on commodity inputs in FY14

Have slightly less than $200 million remaining under current repurchase plan

Rapid Pick-Up will be implemented system-wide by year end

Sandwich production times have improved materially, down 35 seconds on average

Labor expenses +40 bps y/y led by the addition of 35 hours per week to stores

G&A and D&A +80 bps and +60 bps y/y and will ramp throughout the year due to planned investment in Panera 2.0

Limited visibility around impact from materially higher marketing spend as the results vary on market-to-market basis

Catering hubs will be dilutive to returns for at least the next year

Management’s inability to clearly explain its full-year assumptions

Management’s apparent lack of confidence

Management’s ongoing commitment to new unit growth

Overall uncertainty and volatility surrounding the Panera 2.0 rollout

Same-store sales trends are abysmal and we believe the street is taking a leap of faith in its 3Q and 4Q estimates.

Traffic growth will be vital in the coming quarters and we will need to see this downward trend reverse meaningfully before we begin to get less bearish.

The street currently expects operating margins to increase on a year-over-year basis by 4Q. We don’t believe this will happen and, considering the bulk of Panera 2.0 will be rolled out in FY15, think next year’s margin assumptions are aggressive as well.

Call with questions.

Howard Penney

Managing Director

Fred Masotta

Analyst

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